Portuguese leaders accept challenge to negotiate broad economic consensus to avoid 2nd bailout

LISBON, Portugal – Portugal's main political parties pledged Friday to try to negotiate a joint economic strategy that aims to spare the country a second international bailout.

But the obstacles to an agreement were clear during the annual State of the Nation debate in Parliament as parties traded accusations over who is to blame for the financial crisis and 10 straight quarters of economic contraction.

Portugal's president appealed to the parties Wednesday to find broad political consensus after a dispute over austerity measures tore the coalition government apart and raised questions about whether the country can abide by the terms of the 78 billion euros ($102 billion) rescue it received two years ago.

Portugal's difficulties over the past two weeks sent a chill through financial markets as investors feared that Europe's debt crisis could flare up again. In recent months, there had been signs that the 17 European Union countries that use the euro, including Portugal, had got over the worst of their three-year debt crisis.

The political upheaval in Lisbon has forced the postponement of the bailout lenders' latest assessment on the country, which was due to begin next week but is now due to take place at the end of August.

As in Greece, the debt inspectors have to assess whether Portugal is complying with the terms of the bailout agreement — in return for the loan, Portugal has to enact a long list of spending cuts and economic reforms. If it doesn't, the creditors can potentially stop disbursing the money due from the bailout fund.

Though Portugal has enough cash to see it through the end of this year, it has to issue bonds worth 14 billion euros and 15 billion euros in 2014 and 2015, respectively, to service maturing loans. The three major international ratings agencies still classify Portugal's credit worthiness at junk status.

The Lisbon stock exchange was 0.4 percent higher Friday morning at 5,442, after closing down 2 percent the previous day. The interest rate on Portugal's 10-year bonds, an indicator of how risky investors see the country, crept up to 6.9 percent from 6.79 percent Thursday. That is close to the 7 percent rate that is regarded as unaffordable and compelled Portugal to seek a financial lifeline from its euro partners and International Monetary Fund.

President Anibal Cavaco Silva, who has no executive powers but is tasked by the constitution with ensuring stable government, said the ruling coalition had lost its credibility after last week's resignations of the finance and foreign ministers in a spat over the scale of planned spending cuts.

Saying a snap election would make things worse, Cavaco Silva urged the three main parties to find common ground on financial policy which would last beyond the end of the bailout program in June 2014. That, he said, would restore the political stability financial markets want.

Prime Minister Pedro Passos Coelho told lawmakers during Friday's debate that parties must "put Portugal first" and thrash out a cross-party agreement.

"To reach a deal we just need to focus on the country's needs and the common interests of the Portuguese," he said.

Though conceding that it "won't be easy to get a credible and long-lasting agreement," he said a lot can be achieved "if we just compromise."

Antonio Jose Seguro, leader of the main opposition Socialist Party, agreed to take part in talks but was sharply critical of the government's record and repeated his view that the best solution would be immediate elections for a new government.

He said the government "is in a state of decomposition," telling the prime minister he should "apologize to the Portuguese for the failure of his policies."

The prime minister's Social Democratic Party, the senior partner in the coalition, and Portugal's bailout creditors say spending cuts must continue.

Other parties want a bigger emphasis on growth amid a 17.6 percent unemployment rate.